Taking the stress out of distressed properties

Recently I’ve been working with a few buyer clients who are interested in purchasing a distressed property--i.e. a short sale or foreclosure. There are a lot of reasons why distressed properties may appeal, potentially great prices at the top of the list. But, buying these types of homes can also be a giant headache if you don’t know what you’re getting yourself into. I put together the below definitions and pointers as a very high-level guide to the process:

SHORT SALE
Definition: When a home is sold for less than what the current owner  owes their lender, and the current owner does not have the funds to make up the difference even after the property is sold, this property is a short sale.

Because short sales are precursors to foreclosures (when the bank takes possession of the property), the current owner is still technically the owner of the property. Therefore, if you submit an offer on a short sale property, you will be negotiating with the current owner--but they will also be required to submit your offer for bank approval.

Pointers:

  • Be patient: The bank approval process can be extremely lengthy--like months. One of the reasons short sale properties are usually listed under market value is to keep buyers interested. Assume about six months from contract to close.
  • As is, most likely: A lot of short sales are sold “as is” because owners and lenders may not want to put forth any additional funds. With short sales though, the owner/seller is required to provide disclosures to buyers. Inspections are also permitted.

FORECLOSURE
Definition: When the current owner is unable to make mortgage payments, and the bank takes possession of the home. There are three stages of the foreclosure process:

  1. Pre-foreclosure: Goes into effect with the owner is two months behind on payments, and the bank files a notice. The owner has a few months during this stage to pay back the loan or sell as a short sale.
  2. Auction: The owner doesn’t make their payments, so the bank attempts to sell the property at auction to the highest bidder.
  3. Bank owned/real estate owned (REO): The home didn’t sell at auction, so the lender lists the property on the MLS.

Pointers:

  • Follow directions: Most lenders will provide very specific instructions about how they want offers submitted. Follow these instructions as strictly as possible--your offer may depend on it.
  • As is, for sure: You can count on these properties being sold “as is.” As a buyer, you can still hire an inspector, but the sell-side is not obligated to fix issues or subsidize costs in any way.
  • Know your numbers: Chances are, the bank will negotiate with you after your offer is submitted. Come up with what you believe is fair market value for the home, and what you’re willing to pay, before you even start negotiating.

Also good to know…

CORPORATELY-OWNED
Definition: When the original owner is relocated for business and sells the property to a relocation company to then sell the property.

ESTATE SALE
Definition: When a homeowner dies and specific individual(s) inherit the home, and receive the proceeds from the sale.

Have you considered a short sale or foreclosure? I’d love to hear about your experience!